Gold Set For Biggest Quarterly Drop Since At Least 1920

On Wednesday, gold declined to a 34-month low after better than expected U.S. economic data. The Commerce Department said that housing prices rose at the fastest pace in seven years. Consumer confidence and orders for durable goods also increased. Positive signs of economic recovery have strengthened the case for monetary stimulus pullback in the United States. The Fed’s massive bond buying program has pushed the yellow metal to record highs.

Expect Gold Prices to Decline Further

The yellow metal is now headed for its biggest decline since at least 1920 in London, according to Joe Richter & Nicholas Larkin of Bloomberg. The yellow metal has declined 22.8 percent this quarter so far. It entered the bear market in April, retreating further from its all-time high of $1,921.15 in September 2011. Spot gold plunged 4.2 percent to a 34-month low of $1,223.54 an ounce. It was last down 3.8 percent to $1,227.86 an ounce. Analysts expect prices to decline further.

The yellow metal has almost always outperformed other commodities during tough times like volatile market conditions, financial stress and widening credit spreads. It is no longer doing that. The world’s largest gold ETF, SPDR Gold Shares posted the largest one-day drop in its holdings since April. On Tuesday, holdings of SPDR Gold Trust declined 16.2 metric tons to 969.5 tons. SPDR has seen a total outflow of 381 tons this year so far. Natixis analyst Bernard Dahdah said that ETFs have seen gold outflow of 550 tons since mid-February.

Emerging Market Demand on Decline

The world’s largest gold consumer, India, is expected to witness a decline in the sales of yellow metal this quarter. Demand for physical gold in India picked up considerably after prices collapsed in April. But that trend is unlikely to continue as the government has taken steps to curb gold import to reduce the current account deficit. The Reserve Bank of India has also instructed regional banks to stop providing loans against gold coins or jewelry.

The recent cash squeeze in China, the world’s No.2 gold consumer, knocked down stock prices despite the People’s Bank of China’s attempts to stabilize markets. A slowdown in China will further hurt demand for physical gold.

CIMB Asia Pacific analyst Daniel Hynes has lowered his rating on gold to Neutral in the short-term. Daniel Hynes says that a strong U.S. dollar, concerns over the monetary easing withdrawal, and lack of inflationary measures would continue to affect gold prices. He now forecasts (graph below) gold to average $1,280 per ounce in the second half of this year before falling to $1,150-$1,200 over the next two years.